Can we use this compound for the gas line of water heater?

yes, it works great on gas lines.

Yes, this product is designed for use with LP, Natural Gas and Propane systems, and any other threaded connection. One thing to note is that you will only need to apply thread sealant to the male side threads (the threads that go into the gas shut off valve). For the flare fittings that the flexible gas line screws onto, the flare makes the seal on the flex line. Just tighten it down and make sure to use a backup to seal the connection on the flex line and flare fitting. Tightening just the nut on the flex line without a backup will most likely tighten the gas valve or other gas line components and not necessarily the compression gas line flare flex connections.